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Trading The "Normal State"

  • #41
  • Oct 9, 2007 2:39pm Oct 9, 2007 2:39pm
Quoting NewstraderFX
The mystery is in how someone can bet on a currency pair for months at a time, using leverage of credit, and pretend that he's going to make it out alive. Forex should never be traded ultra-short-term or uber-long-term. Forex should be traded sane-term, if you want to make full use of the benefits you have been provided with.

Show me the study that says you will only lose if you trade in an uber long term.
It doesn't need a study, it's simple math. What happens if you go long GBPJPY and use some amount of leverage (say 50:1) on your long positions. There is no way on earth you will skip the liquidity squeeze - not even short term traders can know that beforehand, and certainly not people who want to make forever-and-ever positions. The idea you are talking about is simply called the carry trade - this is nothing new. It does not mean you can effortlessly make 80% a year, it just means that if you are already a successful trader who can spot movements early in the reasonable short term, then you can use the credit gap and the rather loose relationship with equities to get a good deal on pairs like the GBPJPY.

And I'm afraid it is you who has the burden of producing evidence, since you are the one making the claims (and not me or phil).

Cheers,
-A
Virtue finds and chooses the mean. Aristotle, Ethica Nichomachea
  • #42
  • Edited 8:02pm Oct 9, 2007 2:58pm | Edited 8:02pm
That's where an appreciation of the fundamentals is essential. There were more then enough signs that pointed to big problems and when liquidity really got squeezed-that was it.

I can't say that getting out before would be that easy-but certainly getting out way before the bottom was not too hard. And as far as getting back in is concerned-no one can know where an exact bottom is but you really don't need to. Certainly after the fed cut and credit conditions eased was an area though.

As far as proving my point, it isn't really my point at all. I'm providing the thinking of one of the world's most important economists.

The idea is that the normal state of the economy is expansion. Absent serious shocks to the system-it expands. Look at the entire history and you'll see this.

And now that because of carry trades, the JPY crosses are attached to this to and that means their natural state is expansion too. That's my contribution to this.

Part of this has to do with how you may percieve things. Let's say I got into this around 236. GBP/JPY hit a high above 239 and it's now in the lower 238's. I didn't lose anything here. I'm still in this with a profit and i'm getting paid interest at a rate around 80% for the year.

But if you're going to make a statement like "forex should never be traded in the uber term", you need to back that up with some facts that supports it.
  • #43
  • Oct 9, 2007 3:05pm Oct 9, 2007 3:05pm
Quoting philmcgrew
Let's assume it is 2 pips or you can insert a number if you have a better one. Now show me how I can make 80% so far this year.

I still didn't catch your answer on how many years you've been long GBPJPY. After all, we live in an expansionist nation right?
Let's put it this way: not as long as I should have been!
  • #44
  • Oct 9, 2007 3:13pm Oct 9, 2007 3:13pm
Quoting Mr demark
The dollar should become a funding currency instead of a yielding one. That means that dollar should fall against high yielders?? no?
Not exactly. The entire mechanism of this is not clear, but the fact that every currency pair is connected to the Dollar is probably a factor.

You don't believe that every currency pair is connected to the Dollar?

OK

GBP/JPY = GBP/USD x USD/JPY
EUR/CHF = EUR/USD x USD/CHF
EUR/GBP = EUR/USD divided by GBP/USD
GBP/CAD = GBP/USD x USD/CAD
AUD/NZD = AUD/USD divided by NZD/USD
GBP/SINGAPORE DOLLAR = GBP/USD x USD/SGD

Why that is, I don't really know. I'd like to though.
  • #45
  • Oct 9, 2007 3:20pm Oct 9, 2007 3:20pm
Quoting NewstraderFX
Your making like 80% interest for the year on GBP/JPY.
Can you please explain the math behind this. I'm quite interested in making an easy 80% per year. So far your answers have been more slippery than those of a female presidential candidate. If you can't back up something you say or read then you have no business repeating it.

I am really starting to get the impression that your strengths lie in the compilation and summarization of news. You're not so hot on the actual implementation aspect. Everything I've heard so far is coulda woulda shoulda crap. Those of us trading on the right side of the chart don't have that luxury.
  • #46
  • Oct 9, 2007 3:50pm Oct 9, 2007 3:50pm
Quoting NewstraderFX
no one can know where an exact bottom is
I'm pretty sure SOME people ventured a guess in that marked area ;p
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Trust price. Know yourself.
  • #47
  • Oct 9, 2007 4:44pm Oct 9, 2007 4:44pm
Re the interest, there I agree with NewstraderFX; essentially the effective interest is relative to the money you have at risk, not the nominal value of the contract - so essentially it is (your leverage)*(swap rate), annualized.
For example - converting everything to USD terms - suppose the value of the GBP/JPY lot is about 100K, and you have committed 5K on a long, and the swap rate is about 4% annualized. Your leverage is 100:5 = 20:1; if you could hold it for a year (haha) your earning on swap would be ~4K, or around 80% of your commitment. (And I assume everyone reading this uses hard ultimate stop-losses and proper money management, so there's no trouble estimating maximum commitment )

As for when to get out of the carry trade, I'll also agree that there were plenty of warning signs - pick just about any collection of indicators, news reports, comments re Japans exporters (and housewives), the fact that Aug is usually a dead month in Japan, what have you. But personally I don't just think it's time to go long in a big way, since the CDO problem hasn't gone away, it's just sleeping.....
  • #48
  • Edited 5:18pm Oct 9, 2007 5:02pm | Edited 5:18pm
Quoting HalifaxCB
Re the interest, there I agree with NewstraderFX; essentially the effective interest is relative to the money you have at risk, not the nominal value of the contract - so essentially it is (your leverage)*(swap rate), annualized.
For example - converting everything to USD terms - suppose the value of the GBP/JPY lot is about 100K, and you have committed 5K on a long, and the swap rate is about 4% annualized. Your leverage is 100:5 = 20:1; if you could hold it for a year (haha) your earning on swap would be ~4K, or around 80% of your commitment. (And I assume everyone reading this uses hard ultimate stop-losses and proper money management, so there's no trouble estimating maximum commitment )
If you used a stop you would have been stopped out of the trade when it dropped 3000 pips. How is that 80%?

Here's the situation posed by the author on the very first post of this thread: Even if you look at GBP/JPY this year alone it's interesting. Let's say you deposited $5000 at the beginning of the year and traded a 2.5 lot position 2.5 standard lots). Right now, you're up 100 pips on the year and around 3600 on the interest. That's $6000 for your $5000 deposit (125%). So far.

How does that work? I wouldn't make a big deal about this but someone is going to read it and think it's true.
  • #49
  • Oct 9, 2007 5:18pm Oct 9, 2007 5:18pm
Quoting HalifaxCB
Re the interest, there I agree with NewstraderFX; essentially the effective interest is relative to the money you have at risk, not the nominal value of the contract - so essentially it is (your leverage)*(swap rate), annualized.
For example - converting everything to USD terms - suppose the value of the GBP/JPY lot is about 100K, and you have committed 5K on a long, and the swap rate is about 4% annualized. Your leverage is 100:5 = 20:1; if you could hold it for a year (haha) your earning on swap would be ~4K, or around 80% of your commitment. (And I assume everyone reading this uses hard ultimate stop-losses and proper money management, so there's no trouble estimating maximum commitment )

As for when to get out of the carry trade, I'll also agree that there were plenty of warning signs - pick just about any collection of indicators, news reports, comments re Japans exporters (and housewives), the fact that Aug is usually a dead month in Japan, what have you. But personally I don't just think it's time to go long in a big way, since the CDO problem hasn't gone away, it's just sleeping.....
Yes but if you had gone long GJ from say, febuary 2004 for a year or more, there would be several points along that time where you would have lost thousands of pips, and if you are trading with a single standard lot (which isnt much) then you have say $8.5 per pip * 1600 pips = a loss much bigger than your initial investment.

And check the 1998 period. Trust me, long term investment on stock index may work, but if you want to use the beauty of forex capabilities like leverage, you cannot live for long without constantly being on your feet. You can't make a 10 year investment then lose 3000 pips in 2-3 weeks like what happened last month. It would not be nice. And if you think it's so simple to get out of the tough spots, take a look at the hedge funds that lost hundreds of millions after investing insane amounts into analysts and highy educated and paid professionals. If it was that simple, anyone would take out a reverse mortgage and be rich in 3 years.
Virtue finds and chooses the mean. Aristotle, Ethica Nichomachea
  • #50
  • Oct 9, 2007 7:13pm Oct 9, 2007 7:13pm
There are a couple of things about Jpy that have been missed completely, and that is because the human time-frame is really quite short.

Japan suffered massively over-inflated asset values, corporate mis-management that would dwarf today's CDO related issues, and a 75% crash in the stock market. After this nobody had any money, nobody would buy housing because the price-trend was down and gradually that sentiment spread to everything. The BoJ went to Zirp to try to stimulate growth and nothing happened! A few years ago (this decade iirc) the BoJ said that Zirp was not consistent with a capitalist or monetarist economy and pushed rates up to around 0.2% - within 3 months they had to be brought down again.

It has taken this long to recover from their economic armageddon. Fish-up a graph of the Nikkei and you will see when it crashed from 40,000 to 10,000 and stuck there for a decade. And still Japanese consumer spending growth remains tiny though the Nikkei is showing signs of recovery at last.

Now tell me that will not happen to you. Here in the UK we have just the right conditions for such a collapse. Forget Northern Rock - it was using money like a baker uses flour; no harvest = tough times. As the jitters set in the money-people sat on their hands and the BoE stepped in like Shylock. The real down-turn could happen like this:- mortgage inducement periods expire, joe public has to refinance at 200% more net monthly outlay than he was paying last year. The financial sector of the economy is in a mess and the city-bonuses which fuel some of the London macro-economy dry-up. The market for second-hand cars, holidays, everything except food and power becomes really tough. The high immigrant manual labour pool goes back to Poland (or wherever) because British people suddenly find it acceptable to do their own plumbing and such like. The rental housing market collapses and asset prices along with it. All because the house of cards was built on perceived value - the only survivors are those with no debt <looks around nervously>.

So xxx/Jpy carry trade will be fruitful until the Japanese economic down-cycle comes to an end, which looks like it could be any time soon, that will be some short! HalifaxCB, you were right on the button with the effective interest rate being your leverage x the interest rate differential; dilluted by the need to hold some working capital. Buy on a Wednesday afternoon, sell on Thursday morning

Here's to happy days.
Minesweeper target: 284
  • #51
  • Edited 9:28pm Oct 9, 2007 8:14pm | Edited 9:28pm
Quoting philmcgrew
Can you please explain the math behind this. I'm quite interested in making an easy 80% per year. So far your answers have been more slippery than those of a female presidential candidate. If you can't back up something you say or read then you have no business repeating it.

I am really starting to get the impression that your strengths lie in the compilation and summarization of news. You're not so hot on the actual implementation aspect. Everything I've heard so far is coulda woulda shoulda crap. Those of us trading on the right side of the chart don't have that luxury.
I'm really starting to get the impression that you want everything handed to you on a silver platter-or you think that I work for you.

I'll tell you what-why don't you do the research yourself. Call your broker and discuss it with them-i'm sure they'll be happy to help you out.

Then after you do the research you can do this: come back to this thread and explain how the process works, because i'm really getting the impression that your strengths lie in busting chops and throwing out ideas and opinions that have no basis in fact and/or that you have no ability to back with any facts.

You've also demonstrated a strange propensity to draw some kind of arbitrary "us and you "(meaning me) dividing line-as if we aren't on the same side to begin with since we're all traders.
  • #52
  • Oct 9, 2007 8:21pm Oct 9, 2007 8:21pm
Quoting Primate
There are a couple of things about Jpy that have been missed completely, and that is because the human time-frame is really quite short.

Japan suffered massively over-inflated asset values, corporate mis-management that would dwarf today's CDO related issues, and a 75% crash in the stock market. After this nobody had any money, nobody would buy housing because the price-trend was down and gradually that sentiment spread to everything. The BoJ went to Zirp to try to stimulate growth and nothing happened! A few years ago (this decade iirc) the BoJ said that Zirp was not consistent with a capitalist or monetarist economy and pushed rates up to around 0.2% - within 3 months they had to be brought down again.

It has taken this long to recover from their economic armageddon. Fish-up a graph of the Nikkei and you will see when it crashed from 40,000 to 10,000 and stuck there for a decade. And still Japanese consumer spending growth remains tiny though the Nikkei is showing signs of recovery at last.

Now tell me that will not happen to you. Here in the UK we have just the right conditions for such a collapse. Forget Northern Rock - it was using money like a baker uses flour; no harvest = tough times. As the jitters set in the money-people sat on their hands and the BoE stepped in like Shylock. The real down-turn could happen like this:- mortgage inducement periods expire, joe public has to refinance at 200% more net monthly outlay than he was paying last year. The financial sector of the economy is in a mess and the city-bonuses which fuel some of the London macro-economy dry-up. The market for second-hand cars, holidays, everything except food and power becomes really tough. The high immigrant manual labour pool goes back to Poland (or wherever) because British people suddenly find it acceptable to do their own plumbing and such like. The rental housing market collapses and asset prices along with it. All because the house of cards was built on perceived value - the only survivors are those with no debt <looks around nervously>.

So xxx/Jpy carry trade will be fruitful until the Japanese economic down-cycle comes to an end, which looks like it could be any time soon, that will be some short! HalifaxCB, you were right on the button with the effective interest rate being your leverage x the interest rate differential; dilluted by the need to hold some working capital. Buy on a Wednesday afternoon, sell on Thursday morning

Here's to happy days.
You have some excellent thoughts there. No doubt there are problems bubbling under there in Blighty and you've outlined them very well. How this all plays out will be interesting to see.
  • #53
  • Oct 9, 2007 9:04pm Oct 9, 2007 9:04pm
Quoting NewstraderFX
I'll tell you what-why don't you do the research yourself. Call your broker and discuss it with them-i'm sure they'll be happy to help you out.
I called and they said you were right. All of their clients are up 125% on the GBPJPY carry trade this year just as you predicted. I guess I didn't get the memo.
  • #54
  • Oct 10, 2007 6:12am Oct 10, 2007 6:12am
Quoting NewstraderFX
GBP/JPY = GBP/USD x USD/JPY
EUR/CHF = EUR/USD x USD/CHF
EUR/GBP = EUR/USD divided by GBP/USD
GBP/CAD = GBP/USD x USD/CAD
AUD/NZD = AUD/USD divided by NZD/USD
GBP/SINGAPORE DOLLAR = GBP/USD x USD/SGD

Why that is, I don't really know. I'd like to though.
are you saying you'd like to know why the math works out?
Relax and be happy.
  • #55
  • Oct 10, 2007 8:27am Oct 10, 2007 8:27am
Sure-It seems that every currency pair is related to the dollar and i'm just curious why that seems to be.
  • #56
  • Oct 10, 2007 9:05am Oct 10, 2007 9:05am
Quoting NewstraderFX
Sure-It seems that every currency pair is related to the dollar and i'm just curious why that seems to be.
NFX.... This is just because USD is the reserve currency of the world and all the central banks quote their currency in terms of USD. The USD is the most liquid currency globally with it being accepted everywhere.

When GBP was the reserve currency 30 or 40 years ago, the same thing happened with the pound sterling. In India, the INR was quoted in terms of pound till July 1991, when the RBI shifted the quoting currency to the USD.

Trade Wise, Trade Well!
  • #57
  • Oct 10, 2007 9:22am Oct 10, 2007 9:22am
Quoting NewstraderFX
Sure-It seems that every currency pair is related to the dollar and i'm just curious why that seems to be.
Kathy Lien gives several pages of reasons why the USD is preferred in her book including the reason Vikrant states. Her references show that over 90% of all currency trades involve the USD.
  • #58
  • Oct 10, 2007 11:24am Oct 10, 2007 11:24am
Quoting Vikrant Goyal
NFX.... This is just because USD is the reserve currency of the world and all the central banks quote their currency in terms of USD. The USD is the most liquid currency globally with it being accepted everywhere.

When GBP was the reserve currency 30 or 40 years ago, the same thing happened with the pound sterling. In India, the INR was quoted in terms of pound till July 1991, when the RBI shifted the quoting currency to the USD.

Trade Wise, Trade Well!
Thanks V-
  • #59
  • Oct 10, 2007 4:06pm Oct 10, 2007 4:06pm
Quoting NewstraderFX
Sure-It seems that every currency pair is related to the dollar and i'm just curious why that seems to be.
ah ok. well its really just some simple math.

lets take this one for instance....
GBP/CAD = GBP/USD x USD/CAD

lets substitute a number for each currency to see how this works. pretend that....

GBP = 10
CAD = 5
USD = 2

so the same equation, with the substitutes, is...

10/5 = 10/2 x 2/5

see, the math works perfectly...currency pairs are just fractions, and so the math works like fractions do

so it is not really about the dollar, its about how it is paired with other currencies. for instance, this statement would also be true if the pairs were offered....

GBP/CAD = GBP/NZD x NZD/CAD

there is no dollar in there, but the equation would work nonetheless

so, the answer to "why is every currency pair is related to the dollar" is simply because every currency has a pair involving the dollar. thats just the way we (humans) set it up i guess.
Relax and be happy.
  • #60
  • Oct 10, 2007 4:37pm Oct 10, 2007 4:37pm
Quoting merlin
ah ok. well its really just some simple math.

lets take this one for instance....
GBP/CAD = GBP/USD x USD/CAD

lets substitute a number for each currency to see how this works. pretend that....

GBP = 10
CAD = 5
USD = 2

so the same equation, with the substitutes, is...

10/5 = 10/2 x 2/5

see, the math works perfectly...currency pairs are just fractions, and so the math works like fractions do
Using real numbers you would need 2 USDCAD contracts to make a GBPCAD (approximately). It's not always a 1:1 relationship to cancel out the USD.
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